StatementS of financial PoSition
29
( IN ThOUsANds)
s TAT E M E N T s O f f I N A N C I A L P O s I T I O N
aS o f J u n e 3 0
20 0 5 20 0 4
aSS e tS
Cash and cash equivalents $ 53,112 $ 75,976
Accounts receivable, net 24,615 22,162
Deferred charges and other assets 23,020 17,071
Contributions receivable, net 78,329 60,303
Notes receivable, principally for student loans, net 35,370 31,926
Investments 4,303,483 3,701,554
Land, buildings and equipment, net of accumulated depreciation 737,511 702,582
Total assets $ 5,255,440 $ 4,611,574
l i a b i l i t i eS
Accounts payable $ 16,015 $ 16,985
Refundable advances 19,967 13,123
Deferred revenue 42,918 46,529
Deposits and other liabilities 70,910 43,982
Amounts payable under split-interest agreements 29,245 25,905
Bonds and notes payable 281,875 283,555
Pension and other postretirement benefits 132,375 107,738
Government advances for student loans 27,801 27,072
Total liabilities 621,106 564,889
n e t aSS e tS
Unrestricted
Undesignated 188,687 120,846
Designated for specific purposes 51,464 122,542
Invested in land, buildings and equipment 455,636 434,073
Funds functioning as endowment 1,665,249 1,383,030
Total unrestricted 2,361,036 2,060,491
Temporarily restricted 1,439,843 1,189,426
Permanently restricted 833,455 796,768
Total net assets 4,634,334 4,046,685
Total liabilities and net assets $ 5,255,440 $ 4,611,574
see accompanying notes to financial statements.
university of notre dame | A N N UA L R E P O RT / 2005
StatementS of cHangeS in unreStricteD net aSSetS
30
( IN ThOUsANds)
yearS enDeD June 30
s TAT E M E N T s O f C h A N g E s I N U N R E s T R I C T E d N E T A s s E T s
20 0 5 20 0 4
o P e rat i n g r ev e n u eS a n D ot H e r a D D i t i o n S
Tuition and fees $ 314,673 $ 295,401
Less: Tuition scholarships and fellowships )
(108,652 (100,330 )
Net tuition and fees 206,021 195,071
Grants and contracts 68,589 68,190
Contributions 24,027 20,301
Investment return distributed 69,801 65,734
Sales and services of auxiliary enterprises 137,354 130,404
Other sources 24,571 22,483
Total operating revenues 530,363 502,183
Net assets released from restrictions for operations 72,737 76,524
Total operating revenues and other additions 603,100 578,707
o P e rat i n g e x P e n S eS
Instruction 219,480 216,487
Research 59,000 54,891
Public service 16,374 18,329
Academic support 40,291 37,718
Student activities and services 25,377 27,178
General administration and support 127,495 113,116
Auxiliary enterprises 127,821 117,044
Total operating expenses 615,838 584,763
Decrease in unrestricted net assets from operations )
(12,738 (6,056 )
n o n - o P e rat i n g c H a n g eS i n u n r eSt r i ct e D n e t aSS e tS
Contributions 6,246 13,036
Investment return:
Investment income 55,396 24,715
Net gain on investments 298,052 284,829
Less: Investment return distributed )
(69,801 (65,734 )
283,647 243,810
Net gain/(loss) on other financial instruments )
(14,753 7,848
Net assets released from restrictions for investment and physical facilities 49,313 50,329
Change in additional pension liability )
(11,170 6,106
Other non-operating changes – 10,450
Increase in unrestricted net assets from
non-operating activities 313,283 331,579
Increase in unrestricted net assets $ 300,545 $ 325,523
see accompanying notes to financial statements.
StatementS of cHangeS in net aSSetS
31
( IN ThOUsANds)
yearS enDeD June 30
s TAT E M E N T s O f C h A N g E s I N N E T A s s E T s
20 0 5 20 0 4
u n r eSt r i ct e D n e t aSS e tS
Operating revenues and other additions $ 603,100 $ 578,707
Operating expenses (615,838
) (584,763 )
Decrease in unrestricted net assets from operations )
(12,738 (6,056 )
Increase in unrestricted net assets from non-operating activities 313,283 331,579
Increase in unrestricted net assets 300,545 325,523
t e m P o ra r i ly r eSt r i ct e D n e t aSS e tS
Contributions 54,460 45,785
Investment income 44,380 24,060
Net gain on investments 272,821 266,628
Change in value of split-interest obligations 806 1,271
Net assets released from restrictions (122,050
) (126,853 )
Increase in temporarily restricted net assets 250,417 210,891
P e r m a n e n t ly r eSt r i ct e D n e t aSS e tS
Contributions 33,225 70,437
Investment income 2,173 1,102
Net gain on investments 551 584
Change in value of split-interest obligations 738
1,226
Increase in permanently restricted net assets 36,687 73,349
Increase in net assets 587,649 609,763
Net assets at beginning of year 4,046,685 3,436,922
Net assets at end of year $ 4,634,334 $ 4,046,685
see accompanying notes to financial statements.
university of notre dame | A N N UA L R E P O RT / 2005
StatementS of caSH flowS
32
( IN ThOUsANds)
yearS enDeD June 30
s TAT E M E N T s O f C A s h f L O w s
20 0 5 20 0 4
caS H f lowS f r o m o P e rat i n g act i v i t i eS
Increase in net assets $ 587,649 $ 609,763
Adjustments to reconcile increase in net assets to
net cash provided/(used) by operating activities:
Depreciation 34,575 33,674
Adjustment to carrying value of buildings and equipment 5,061 11,139
Changes in operating assets and liabilities:
Accounts receivable, deferred charges and other assets )
(8,402 (4,757)
Contributions receivable )
(18,026 12,473
Accounts payable, refundable advances, deferred revenue,
and deposits and other liabilities 29,191 (16,705 )
Amounts payable under split-interest agreements 3,340 4,663
Pension and other postretirement benefits 24,637 9,445
Contributions for investments and physical facilities )
(58,454 (123,458 )
Investment income restricted for reinvestment )
(2,173 (1,102 )
Net gain on investments )
(571,424 (552,041)
Other, net 2,215 (1,177)
Net cash provided/(used) by operating activities 28,189 (18,083 )
caS H f lowS f r o m i n v eSt i n g act i v i t i eS
Purchases of investments, net )
(32,720 (47,589 )
Purchases of land, buildings and equipment )
(74,565 (54,111)
Student loans granted )
(10,202 (6,906 )
Student loans repaid 6,713 6,606
Other changes in notes receivable 45 233
Net cash used by investing activities )
(110,729 (101,767)
caS H f lowS f r o m f i n a n c i n g act i v i t i eS
Contributions received restricted for:
Investments 46,260 109,178
Physical facilities 12,194 14,280
Investment income restricted for reinvestment 2,173 1,102
Proceeds from bonds issued – 65,000
Repayment of bonds and notes )
(1,680 (34,264 )
Government advances for student loans 729 477
Net cash provided by financing activities 59,676 155,773
Net change in cash and cash equivalents )
(22,864 35,923
Cash and cash equivalents at beginning of year 75,976 40,053
Cash and cash equivalents at end of year $ 53,112 $ 75,976
see accompanying notes to financial statements.
note 1. | sUMMARY Of sIgNIfICANT ACCOUNTINg POLICIEs
33
baS i S o f P r eS e n tat i o n
The University of Notre Dame du Lac is a private, coeducational, national Catholic research university. The accompanying financial
NOTEs
statements include the assets and operations of certain other entities, which are owned and operated by the University of Notre Dame du
Lac. The University of Notre Dame du Lac and entities included herein are referred to individually and collectively as the “University.”
The accompanying financial statements have been prepared on the accrual basis of accounting and in accordance with the reporting
principles of not-for-profit accounting as defined by Statement of Financial Accounting Standards (SFAS) 116 “Accounting for Contri-
butions Received and Contributions Made,” and SFAS 117 “Financial Statements of Not-for-Profit Organizations.” SFAS 116 requires
unconditional promises to give be recorded as receivables and revenue within the appropriate net asset category. SFAS 117 establishes
standards for general-purpose external financial statements of not-for-profit organizations, including a statement of financial position, a
statement of changes in net assets and a statement of cash flows.
The accompanying financial statements have been prepared to focus on the University as a whole and to present balances and transactions
according to the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as follows:
Unrestricted Net Assets—Net assets not subject to donor-imposed restrictions. Such assets are available for any purpose consistent with
the University’s mission.
Temporarily Restricted Net Assets—Net assets subject to specific, donor-imposed restrictions that must be met by actions of the University
and/or passage of time. Such assets normally fund specific expenditures of an operating or capital nature.
Permanently Restricted Net Assets—Net assets subject to donor-imposed restrictions requiring they be maintained permanently by the
University. Such assets are normally restricted to long-term investment with income earned and appreciation available for specific or
general University purposes.
Revenues are reported as increases in unrestricted net assets unless use of the related assets is limited by donor-imposed restrictions.
Expenses are reported as decreases in unrestricted net assets. Gains and losses on investments are reported as increases or decreases in
net assets consistent with the restrictions placed on their use by either the donor or by law. Expirations of temporary restrictions on
net assets, that is, the donor-imposed purpose has been fulfilled and/or the stipulated time period has elapsed, are reported as net assets
released from restrictions and reclassified from temporarily restricted net assets to unrestricted net assets.
Revenues associated with research and other grants and contracts are recognized when related costs are incurred. Indirect cost recovery
by the University on U.S. government grants and contracts is based upon a predetermined negotiated rate and is recorded as unrestricted
revenue. Advances from granting agencies are generally considered refundable in the unlikely event specified services are not performed.
The University’s measure of operations as presented in the statements of changes in unrestricted net assets includes income from tuition
and fees, grants and contracts, unrestricted contributions, investment return distributed according to the University’s spending plan and
revenues from auxiliary enterprises and other sources. Other additions include net assets released from restrictions based upon their use
in support of operations. Operating expenses are reported by functional categories, after allocating costs for operations and mainte-
nance of plant, interest on indebtedness and depreciation expense.
Non-operating activity presented in the statements of changes in unrestricted net assets includes unrestricted contributions designated
by the University for endowment and acquisition of physical facilities and equipment, investment return in excess of or less than the
amount distributed under the spending plan, any gains or losses on other financial instruments, net assets released from restrictions
designated for investment and physical facilities, and other activities considered to be more of an unusual or non-recurring nature.
co n t r i b u t i o n S
Contributions include unconditional promises to give that are recognized as revenues—either temporarily restricted or permanently
restricted—in the period such commitments are received. Conditional promises to give are recognized when the conditions on which
they depend are substantially met. Contributions to be received in future years are discounted at a U.S. Treasury rate commensurate
with the payment plan. Amortization of the discount is recorded as additional contribution revenue. Allowance is made for uncollect-
ible contributions based upon management’s expectations regarding collection of outstanding promises to give and the University’s
collection experience.
aux i l i a ry e n t e r P r i S eS
The University’s auxiliary enterprises exist primarily to furnish goods and services to students, faculty and staff. Managed as essentially
self-supporting activities, the University’s auxiliaries consist principally of residence halls, dining halls, intercollegiate athletics and col-
lege stores. Auxiliary enterprise revenues and fully costed expenses are reported as changes in unrestricted net assets.
university of notre dame | A N N UA L R E P O RT / 2005
caS H a n D caS H eq u i va l e n tS
34
Resources invested in money market funds and in short-term investments with maturities at date of purchase of three months or less are
classified as cash equivalents, except that any such investments purchased by external investment managers are classified as investments.
NOTEs
i n v eSt m e n tS
Valuation
Investments are stated at fair value and are recorded on the trade or contract date. The estimated fair value of investments is based on
quoted market prices, except for alternative investments for which quoted market prices are not available. The estimated fair value of
certain alternative investments, such as private equity interests, is based on valuations provided by the external investment managers as
of March 31, adjusted for cash receipts, cash disbursements and securities distributions through June 30. The University believes the
carrying amount of these financial instruments is a reasonable estimate of fair value. Because alternative investments are not readily
marketable, their estimated value is subject to uncertainty and therefore may differ from the value that would have been used had a
ready market for such investments existed. Such difference could be material.
The value of forward foreign currency exchange contracts is estimated using available market quotations obtained from banks and
foreign exchange dealers. The change in market value of all foreign currency exchange contracts is recorded as unrealized gain or loss on
investments. The fair value of these contracts is reported on a net-by-counterparty basis in the statements of financial position where
management believes a legal right of offset exists under an enforceable netting agreement.
Open futures and options contracts are primarily valued at the closing exchange quotations on the last business day of the year. The fair
value of certain options contracts for which market quotations are not readily available are based upon valuations provided by counter-
parties, which represent the estimated amount the counterparties would receive or pay to terminate the contract at the reporting date.
Brokerage commissions on open positions are accrued as a liability of the University in full upon the initiation of such open positions.
Upon entering into futures contracts, the University is required to pledge to the broker an amount of cash or securities equal to the
minimum initial margin requirements of the exchange on which the contracts are traded. New contracts and changes in margin require-
ments resulting from changes in the fair value of the instruments are funded each business day.
Off-Balance Sheet Risk
The University’s investment strategy incorporates certain financial instruments that involve, to varying degrees, elements of market risk
and credit risk in excess of amounts recorded in the financial statements. Market risk is the potential for changes in the value of financial
instruments due to market changes, including interest and foreign exchange rate movements and fluctuations embodied in forward,
futures, commodity or security prices. Market risk is directly impacted by the volatility and liquidity of the markets in which the related
underlying assets are traded. Credit risk is the possibility that a loss may occur due to the failure of a counterparty to perform according
to the terms of the contract. The University’s risk of loss in the event of counterparty default is typically limited to the amounts recog-
nized in the statements of financial position and is not represented by the contract or notional amounts of the instruments.
The University bears risks upon entering into foreign currency exchange contracts from the potential inability of counterparties to meet
the terms of their contracts; these risks are generally limited to the amount of unrealized gain, if any, at date of default. The University’s
risks may also arise from the unanticipated movements in the value of any foreign currency relative to the U.S. dollar. To reduce the
impact of changing foreign currency exchange rates on the U.S. dollar value of its international equity holdings, the University utilizes a
dynamic currency overlay strategy. While operating within specified risk parameters, the currency overlay manager is expected to outper-
form a specified hedged benchmark by actively managing individual currency risks utilizing forward foreign currency exchange contracts.
Endowment
The University has adopted an endowment spending policy that attempts to meet three objectives: (1) provide a predictable, stable stream
of earnings to fund participants; (2) ensure the purchasing power of this revenue stream does not decline over time; and (3) ensure the
purchasing power of the endowment assets do not decline over time. Under this policy as approved by the Board of Trustees, investment
income, as well as a prudent portion of realized and unrealized gains, may be expended for the operational needs of fund participants.
ot H e r f i n a n c i a l i n St ru m e n tS
3
The University utilizes derivative instruments in a limited manner, primarily interest rate swap agreements, to manage interest rate risk
associated with its debt portfolio. These instruments are reported in the statements of financial position at fair value, which is based on
valuations provided by counterparty banks and represents the estimated amount that counterparties would receive or pay to terminate
NOTEs
the instrument at the reporting date. Any gains or losses resulting from changes in the fair value of these instruments or periodic net
cash settlements with counterparties are recognized currently as non-operating changes in unrestricted net assets.
l a n D, b u i l D i n gS a n D eq u i P m e n t
Institutional properties are stated at cost or at estimated fair value if acquired by gift, less accumulated depreciation. Depreciation is
computed using the straight-line method over the estimated useful lives of the assets, averaging 15 years for land improvements, 25–50
years for buildings and 5–25 years for equipment.
The University does not capitalize the cost of library books, nor the cost or fair value of its art collection. The latter is held for exhibi-
tion and educational purposes only and not for financial gain.
The University has applied the provisions of AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use,” when accounting for costs related to the development of software for internal use.
S P l i t- i n t e r eSt ag r e e m e n tS
The University’s split-interest agreements consist principally of irrevocable charitable remainder trusts for which the University serves
as trustee. Assets held in these trusts are included in investments. Contribution revenues are recognized at the date the trusts are
established after recording liabilities for the present value of the estimated future payments to be made to beneficiaries. The liabilities
are adjusted during the term of the trusts for changes in the actuarial value, accretion of the discount and other changes affecting the
estimates of future benefits.
u S e o f eSt i m at eS
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the finan-
cial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
ta x Stat u S
The University is a qualified tax-exempt organization under section 501(c)(3) of the Internal Revenue Code.
r ec l aSS i f i cat i o n S
Certain amounts in the 2004 financial statements and footnotes have been reclassified to conform with the 2005 presentation.
note 2. | ACCOUNTs ANd NOTEs RECEIVABLE
At June 30, 2005, accounts and notes receivable are stated net of allowances of $421,000 and $1,117,000, respectively. At June 30,
2004, these allowances were $1,630,000 and $1,204,000, respectively.
Notes receivable are principally amounts due from students under U.S. government sponsored loan programs, which are subject to
significant restrictions. As it is not practicable to determine the fair value of such amounts, notes receivable are recorded at face value.
university of notre dame | A N N UA L R E P O RT / 2005
note 3. | CONTRIBUTIONs RECEIVABLE
36
Contributions receivable are summarized as follows at June 30 (in thousands):
20 0 5 20 0 4
NOTEs
Unconditional promises expected to be collected in:
Less than one year $ 26,006 $ 28,082
One year to five years 53,912 41,551
More than five years 60,739 25,726
140,657 95,359
Less:
Unamortized discount 31,964 15,715
Allowance for uncollectible amounts 30,364 19,341
62,328 35,056
$ 78,329 $ 60,303
Contributions receivable are distributed between net asset classifications as follows at June 30 (in thousands):
20 0 5 20 0 4
Temporarily restricted $ 49,047 $ 33,144
Permanently restricted 29,282 27,159
$ 78,329 $ 60,303
note 4. | INVEsTMENTs
Investments are summarized as follows at June 30 (in thousands):
20 0 5 20 0 4
COsT fA I R VA L U E COsT fA I R VA L U E
Short-term investments $ 179,198 $ 194,151 $ 229,212 $ 230,730
Equity securities 1,206,582 1,507,146 1,091,641 1,327,393
Debt securities 300,278 317,957 361,922 375,420
Real estate 107,811 142,736 95,090 129,742
Other investments 1,973,265 2,141,493 1,584,404 1,638,269
$ 3,767,134 $ 4,303,483 $ 3,362,269 $ 3,701,554
Other investments include alternative investment strategies, such as private equity and marketable alternatives.
Investments totaling $4.11 billion at June 30, 2005 and $3.51 billion at June 30, 2004, are pooled on a market value basis with each participating
fund owning units in the pool. Additions or withdrawals are based on the market value of the pooled investments. The value per unit was $2,130
and $1,835 at June 30, 2005, and 2004, respectively. Certain other investments are held in specific instruments to comply with donor requirements.
The University is obligated under certain investment contracts to periodically advance additional funding up to contractual levels. At June 30,
2005 such amounts approximated $1.14 billion.
i n v eSt m e n t r e t u r n
Investment return for the years ended June 30, 2005, and 2004, is comprised of the following (in thousands):
20 0 5 20 0 4
Investment income, net $ 101,949 $ 49,877
Realized gain 375,051 267,620
Unrealized gain 196,373 284,421
$ 673,373 $ 601,918
Investment income is reported net of related expenses, primarily investment advisory fees, of $14,566,000 and $14,563,000 for the years ended
June 30, 2005, and 2004, respectively.
note 5. | LANd, BUILdINgs ANd EQUIPMENT
3
The following is a summary of land, buildings and equipment at June 30 (in thousands):
20 0 5 20 0 4
NOTEs
Land and land improvements $ 56,235 $ 51,647
Buildings 735,166 720,659
Equipment 179,791 180,273
Construction in progress 62,809 24,377
1,034,001 976,956
Less accumulated depreciation 296,490 274,374
$ 737,511 $ 702,582
Depreciation expense was $34,575,000 and $33,674,000 for the years ended June 30, 2005, and 2004, respectively. The University has commit-
ments to expend approximately $41 million to complete various construction projects as of June 30, 2005.
note 6. | BONds ANd NOTEs PAYABLE
Bonds and notes payable consist of the following at June 30 (in thousands):
20 0 5 20 0 4
St. Joseph County, Indiana
Educational Facilities Revenue Bonds:
Series 2003, bearing interest at 2.50 percent
through 2007, variable thereafter through 2038 $ 65,000 $
65,000
Series 2002, bearing interest at a variable rate
(2.18 percent currently) through 2037 65,000
65,000
Series 1998, bearing interest at a variable rate
(2.20 percent currently) through 2033 43,000 43,000
Series 1997, bearing interest at 4.5 percent
to 5.25 percent through 2027 28,275 28,975
Series 1996, bearing interest at 5.5 percent
to 6.5 percent through 2026 30,000 30,000
Indiana Educational Facilities Authority Revenue Bonds:
Series 1997, bearing interest at 4.5 percent
to 5.25 percent through 2025 22,830 22,910
Series 1995, bearing interest at a variable rate
(2.18 percent currently) through 2025 26,500 26,500
Notre Dame du Lac Dormitory Refunding and
Construction Bonds bearing interest at
3 percent through 2018 1,270 1,350
Mortgage notes payable, bearing interest
at 3 percent through 2019 – 820
$ 281,875 $ 283,555
The aggregate scheduled maturities of the bonds and notes payable for each of the five fiscal years subsequent to June 30, 2005, are as follows (in
thousands): $900 in 2006; $940 in 2007; $985 in 2008; $1,025 in 2009; and $1,070 in 2010.
The Dormitory Refunding and Construction Bonds and mortgage notes are collateralized by the facilities to which they relate. The Indiana and
St. Joseph County Educational Facilities Authority Revenue Bonds represent general obligations of the University and are not collateralized by
the related facilities. Unexpended proceeds of approximately $15,000,000 from the Series 2003 St. Joseph County Educational Facilities Author-
ity Revenue Bonds at June 30, 2004, were fully expended during the fiscal year ended June 30, 2005.
The fair value of the University’s bond and note obligations approximates the aggregate carrying value at June 30, 2005 and 2004.
university of notre dame | A N N UA L R E P O RT / 2005
The University utilizes interest rate swaps as a strategy for managing interest rate risk associated with certain bond issues. Under the terms of
38 swap arrangements that seek to effectively fix the variable rates associated with certain issues, the University pays fixed rates ranging from 3.37
percent to 4.177 percent and receives variable rates ranging from 67 percent to 70 percent of the London Interbank Offer Rate (LIBOR) on
total notional amounts of $86,700,000. A separate swap arrangement seeks to convert the fixed rate on the Series 2003 bonds to a variable rate
NOTEs
through 2007. Under the terms of this swap, the University pays a variable rate equal to the Bond Market Association (BMA) Municipal Swap
Index and receives a fixed rate of 2.35 percent on a notional amount of $65,000,000. The estimated fair value of interest rate swaps was a net
unrealized loss position of $8,776,000 and $2,818,000 at June 30, 2005 and 2004, respectively. The University paid periodic net settlements of
$1,664,000 and $1,440,000 to counterparties pursuant to interest rate swaps during the years ended June 30, 2005 and 2004, respectively.
Total interest costs incurred and paid by the University were $8,376,000 and $8,442,000, respectively, for the year ended June 30, 2005. Interest
costs incurred and paid were $7,950,000 and $8,130,000, respectively, for the year ended June 30, 2004.
The University maintains an unsecured line of credit in the amount of $50 million with a major commercial bank to be used for working capital
purposes. On March 21, 2005 the line of credit agreement was amended, extending the termination date to March 30, 2006. The available line
of credit was entirely unused at June 30, 2005 and 2004.
note 7. | PENsION ANd OThER RETIREMENT PLANs
D e f i n e D co n t r i b u t i o n r e t i r e m e n t Sav i n gS P l a n
Faculty and certain administrative employees who have completed one year of full-time service at the University are eligible to participate in the
defined contribution retirement savings plan. Staff members participating in the plan have the option of directing their contributions and the
University’s contributions on their behalf to Teachers Insurance and Annuity Association, Fidelity Investments or the Vanguard Group. Partici-
pating staff are immediately vested in the plan. The University’s share of the cost of these benefits was $16,038,000 and $15,200,000 for the
years ended June 30, 2005, and 2004, respectively.
DefineD benefit PenSion Plan
Retirement benefits are provided for other employees under a defined benefit, trusteed pension plan administered by the University. This plan
provides benefits for certain administrative and staff employees who have completed at least five years of service at a minimum of 1,000 hours of
service each year. The University funds the plan with annual contributions that meet ERISA minimum requirements. The plan assets and their
related actuarially determined benefit obligation are included in investments and pension and other postretirement benefits, respectively, on the
statements of financial position as of June 30, 2005, and 2004.
At June 30, 2005 and 2004, the accumulated benefit obligation with respect to the plan exceeded the fair value of plan assets by more than
the actuarially determined unrecognized prior service cost. As such, the University recognized a minimum pension liability adjustment of
$18,040,000 and $6,870,000 at June 30, 2005 and 2004, respectively. The decrease or increase in the required minimum pension liability adjust-
ment is reflected as a non-operating gain or loss in the statements of changes in unrestricted net assets.
The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of
employees expected to receive benefits under the plan.
The following tables set forth the funded status of the defined benefit pension plan as well as the components of net periodic benefit cost and the 39
weighted-average assumptions at June 30 (in thousands):
20 0 5 20 0 4
NOTEs
c H a n g e i n b e n e f i t o b l i gat i o n
Projected benefit obligation at beginning of year $ 102,912 $ 95,693
Service cost 4,567 4,626
Interest cost 5,997 5,889
Actuarial loss 17,747 333
Benefit payments )
(3,687 (3,629 )
Projected benefit obligation at end of year 127,536 102,912
c H a n g e i n P l a n aSS e tS
Fair value of plan assets at beginning of year 63,813 54,728
Actual return on plan assets 6,570 8,161
Employer contributions 4,069 4,553
Benefit payments )
(3,687 (3,629 )
Fair value of plan assets at end of year 70,765 63,813
Funded status )
(56,771 (39,099 )
Unrecognized net loss 44,426 29,235
Unrecognized prior service costs 291 384
Accrued benefit cost )
(12,054 (9,480 )
Minimum pension liability adjustment (18,040
) (6,870 )
Total liability $ )
(30,094 $ (16,350 )
co m P o n e n tS o f n e t P e r i o D i c b e n e f i t coSt
Service cost $ 4,567 $ 4,626
Interest cost 5,997 5,889
Expected return on plan assets )
(5,252 (4,774 )
Amortization of:
Unrecognized net loss 1,237 1,648
Unrecognized prior service cost 92 92
Net periodic benefit cost $ 6,641 $ 7,481
Accumulated benefit obligation at end of year $ 101,150 $ 80,547
w e i g H t e D -av e rag e aSS u m Pt i o n S
Discount rate 5.00% 6.25%
Expected long-term rate of return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
The projected benefit payments under the plan for each of the five fiscal years subsequent to June 30, 2005 are as follows (in thousands): $3,846
in 2006; $4,048 in 2007; $4,288 in 2008; $4,558 in 2009; and $4,870 in 2010. Projected aggregate benefit payments under the plan for the five
year period ended June 30, 2015 are $30,969,000. The University’s estimated contributions to the plan for the year subsequent to June 30, 2005
are $5,560,000.
The assets of the defined benefit pension plan are invested in a manner that is intended to achieve a rate of return of 8.5 percent, which is the
plan’s assumed long-term rate of return. In order to preserve the purchasing power of the plan and provide payments to beneficiaries, a rate of
return objective of inflation plus 5.0 percent is targeted.
The investment portfolio of the plan is diversified in a manner that is intended to achieve the return objective and reduce the volatility of returns.
The plan relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and
current yield (interest and dividends) over a long-term time horizon. Third party managers invest the plan’s assets.
Actual and targeted allocations of the plan’s assets by investment category were as follows at June 30:
20 0 5 20 0 4 ta r g e t
Short-term investments 3% 1% 0%
Equity securities 48% 53% 50%
Debt securities 25% 23% 25%
Other assets 24% 23% 25%
100% 100% 100%
Other assets include alternative investment strategies, such as private equity and marketable alternatives.
university of notre dame | A N N UA L R E P O RT / 2005
note 8. | POsTRETIREMENT BENEfITs OThER ThAN PENsIONs
40
The postretirement benefit plans offered by the University provide medical insurance benefits for retirees and their spouses. Employees are eligible
for such benefits if they retire after attaining specified age and service requirements while employed by the University. The plans are funded as
NOTEs
claims are paid.
During the year ended June 30, 2004, the University changed certain features of its postretirement benefit plans and amended eligibility require-
ments for participation in these plans. The combined effect of these amendments on the accumulated postretirement benefit obligation (APBO)
was a decrease of $17,491,000.
The amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of
employees expected to receive the benefits under the plan.
The following tables set forth the funded status of postretirement benefits as well as the components of net periodic benefit cost and the weighted-
average assumptions at June 30 (in thousands):
20 0 5 20 0 4
c H a n g e i n b e n e f i t o b l i gat i o n
Accumulated postretirement benefit obligation at beginning of year $ 31,984 $ 41,836
Service cost 2,929 2,379
Interest cost 2,569 2,299
Plan amendments – (17,491)
Actuarial loss 22,233 4,075
Benefit payments )
(1,000 (1,114 )
Accumulated postretirement benefit obligation at end of year 58,715 31,984
c H a n g e i n P l a n aSS e tS
Fair value of plan assets at beginning of year – –
Actual return on plan assets – –
Employer contributions 1,000 1,114
Benefit payments )
(1,000 (1,114 )
Fair value of plan assets at end of year – –
Funded status )
(58,715 (31,984 )
Unrecognized net loss 36,656 16,231
Unrecognized prior service costs )
(9,457 (11,822 )
Unrecognized net transition obligation – –
Accrued benefit cost $ )
(31,516 $ (27,575 )
co m P o n e n tS o f n e t P e r i o D i c b e n e f i t coSt
Service cost $ 2,929 $ 2,379
Interest cost 2,569 2,299
Expected return on plan assets – –
Amortization of:
Unrecognized net loss – 236
Unrecognized prior service cost )
(2,364 (1,182 )
Unrecognized net obligation 1,808 921
Net periodic benefit cost $ 4,942 $ 4,653
w e i g H t e D -av e rag e aSS u m Pt i o n S
Discount rate 5.00% 6.25%
Health care cost trend rate (grading to 5.00% in 2012) 8.50% 9.00%
A one-percentage-point increase in the assumed health care cost trend rate would have increased aggregate service and interest costs and the
APBO by approximately $1,200,000 and $10,151,000, respectively. Likewise, a one-percentage-point decrease in the assumed health care cost
trend rate would have decreased aggregate service and interest costs and the APBO by approximately $977,000 and $8,661,000, respectively.
The projected postretirement benefit payments for each of the five fiscal years subsequent to June 30, 2005 are as follows (in thousands): $1,146
in 2006; $1,251 in 2007; $1,386 in 2008; $1,521 in 2009; and $1,676 in 2010. Projected aggregate postretirement benefit payments for the five
year period ended June 30, 2015 are $11,008,000.
note 9. | REsTRICTEd NET AssETs ANd ENdOwMENT
41
Temporarily restricted net assets consist of the following at June 30 (in thousands):
20 0 5 20 0 4
NOTEs
Contributions and earnings for operating purposes $ 58,984 $ 53,547
Contributions for the acquisition of buildings and equipment 165,062 166,682
Split-interest agreements 9,337 11,999
Funds functioning as endowment 1,206,460 957,198
$ 1,439,843 $ 1,189,426
Permanently restricted net assets consist of the following at June 30 (in thousands):
20 0 5 20 0 4
Endowment funds $ 818,985 $ 783,226
Student loan funds 5,313 4,701
Split-interest agreements 9,157 8,841
$ 833,455 $ 796,768
The fair value of endowment and funds functioning as endowment is summarized as follows at June 30 (in thousands):
20 0 5 20 0 4
Unrestricted $ 1,665,249 $ 1,383,030
Temporarily restricted 1,206,460 957,198
Permanently restricted 818,985 783,226
$ 3,690,694 $ 3,123,454
The aggregate amount of deficiencies for all donor-restricted endowment funds for which the fair value of the assets is less than the level required by
donor stipulations was $104,000 at June 30, 2005, and $1,900,000 at June 30, 2004. These unrealized losses have been recorded as non-operating
reductions in unrestricted net assets. Future market gains will be used to restore this deficiency in unrestricted net assets before any net appreciation
above the level required by donor stipulations or law increases temporarily restricted net assets.
note 10. | NON-OPERATINg ChANgEs IN UNREsTRICTEd NET AssETs
The University received a $10,450,000 favorable settlement of litigation during the year ended June 30, 2004, which is reflected as a non-operating
change in the statements of changes in unrestricted net assets.
note 11. | CONTINgENCIEs
The University is a defendant in various legal actions arising out of the normal course of its operations. Although the final outcome of such actions can-
not currently be determined, the University believes that eventual liability, if any, will not have a material effect on the University’s financial position.
All funds expended in conjunction with government grants and contracts are subject to audit by government agencies. In the opinion of management,
any liability resulting from these audits will not have a material effect on the University’s financial position.
university of notre dame | A N N UA L R E P O RT / 2005
rePort of inDePenDent auDitorS
42
REP O RT O f I N d EPEN d ENT AU d ITO Rs
Board of Trustees
University of Notre Dame du Lac
Notre Dame, Indiana
In our opinion, the accompanying statements of financial position and the related statements of changes in unrestricted net assets,
changes in net assets and cash flows present fairly, in all material respects, the financial position of the University of Notre Dame du Lac
(the “University”) at June 30, 2005 and 2004, and the changes in its net assets and its cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the
University’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
Chicago, Illinois
October 7, 2005